Business doesn’t create jobs, consumers do/more debt ceiling comments

It is an article of faith by all parties involved that businesses are the job creators, particularly small businesses, and hence their every move is predicated on helping businesses create jobs.

Mercy! Can’t they get anything right?

Businesses hire to service consumers. A restaurant that’s full doesn’t layoff anyone, no matter how much he hates the government, and the same goes for department stores, engineering firms, etc.

And when stores are empty, there’s no way they will or should hire. It’s a waste of human endeavor. In fact, business serves public purpose best by producing and selling its output with as few employees as possible. That’s called productivity, which is what makes us rich in real terms.

Labor is inherently a scarce resource. There are only so many of us to get all the work done. We lost eight million jobs in 2008. Why? Because eight million people all of a sudden decided they’d rather go on the dole than work?

No. It’s because sales collapsed. In a heartbeat, car sales went from near 17 million/yr to just over 9 million/yr. And why did sales collapse? Because we all lost our credit cards.

How do we get back sales and all the lost jobs, and then some? How about we stop taking FICA (Social Security and Medicare taxes) out of the paychecks of people who work for a living, so sales can resume from income rather than from consumer debt? What’s wrong with that?

And how about suspending FICA for businesses as well, to lower their costs and help keep consumer prices from rising. That would also be a good thing.

So why don’t our fearless leaders just do it? Because they think they need those taxed dollars for Social Security and Medicare.

Can’t they get anything right?

Federal taxes regulate demand (our spending), they don’t ‘bring in’ anything. The federal government ‘collects taxes’ simply by lowering the balance in our bank account. No gold coin drops into some government bucket. It’s just data entry, just the Federal Reserve changing numbers on their spreadsheets.

Chairman Bernanke has told us repeatedly how the federal government actually spends, including Social Security and Medicare spending: they just use their computer to mark up the numbers in our bank accounts. They don’t call China for a loan and they don’t check with the IRS to see how collections are going.

Federal government spending doesn’t ‘come from’ anywhere. Everyone inside the Federal Reserve knows it, and has always known it. They know that suspending FICA taxes does not alter their ability to make Social Security and Medicare payments. They all laugh off the idea that FICA actually funds anything – a ‘useful fiction’ as it’s been called since the program began in the 1930’s.

That ‘useful fiction’ is no longer seems very useful, unless you’re trying to destroy the US economy.

Even with sky-high unemployment we can easily afford to both suspend FICA and truly strengthen Social Security and Medicare by increasing the minimum benefits and closing the donut holes.

This is not ‘adding stimulus’. It’s removing drag by removing massively regressive and punishing taxes. And it allows consumers to drive sales until they’ve created all the private sector jobs we need.

And I see no harm, along the way, in sustaining the public infrastructure that serves public purpose, and tossing the states a per capita payment to make up for what the federal government did to them in 2008. And, as should go without saying, there should be an $8/hr federally funded transition job for anyone willing and able to work, to facilitate the transition from unemployment to private sector employment.

But that’s not what’s going to happen.

It looks to me like there are too many members of Congress who can’t vote for any package, due to prior pledges: Democrats who can’t vote for cuts in Social Security benefits or eligibility, Republicans pledged not to ever vote to raise taxes, and some pledged to never vote to raise the debt ceiling for any reason. The compromise packages lose votes from both sides from those who are pledged to never compromise.

This means a partial federal shutdown is a high probability, with a sudden cut in spending cutting into sales and therefore jobs, as just described.

Treasury rates will stay low and probably fall further, with the Fed rates presumed to stay low for a lot longer. Energy and commodities will deflate, the dollar will get stronger, stocks will fall as top line growth forecasts fall, Europe and Asian stocks will fall as their largest export market becomes at-risk. And, as sales fall and unemployment rises, the US deficit will rise via the automatic stabilizers of falling tax revenues and increased transfer payments – if the government pays them…

And if, alternatively, a compromise package is reached, the deficit reduction plan will cause the same things to happen, only not as severely, and it’s back to death by a thousand cuts.

mmt describes what is, particularly current institutional arrangements, including the self imposed constraints.

let me suggest a quick read of ‘soft currency economics’ on this website for your other questions?

quickly, ‘excess’ reserves mean the fed funds rate fall approximately to the rate of interest the Fed pays on reserves.
When soft currency economics was written that rate was 0. more recently the fed started paying interest on reserves.

not sure what ‘convert assets’ means but at maturity of tsy bonds the fed debits your securities account and credits the reserve account of your bank.
it also debits the tsy’s fed account, where the tsy keeps a positive balance as required by law by getting credited as taxes are paid and by selling new tsy securities

I have no particular insight on why he might be wrong or what has changed in the last couple days… must be something for people to get this pessimistic about a possible shutdown? (There is plenty else to be pessimistic about of course).

“Goes without saying by all parties involved that businesses are the job creators.
Particularly small business.”
I read of a recent study that indicates the it is “new” businesses that create the most jobs, not just the small ones. Obviously, most new businesses start small, but older small businesses are in the same boat as larger ones: not enough aggregate demand, therefore, little or no hiring.

@John Zelnicker, Small and new businesses hire more because they tend to be cash strapped and it is cheaper to hire people (a variable cost) to meet demand. A growing business usually has negative cash flow (cost money to grow a business), so they tend to not have money for large capital outlays to meet growth.

@WARREN MOSLER, Perhaps there should be an “Advocacy” discussion thread opened on your site or another MMT site, such as New Economic Perspectives. I think Internet tools (blogs, social networking, etc) reduce the importance of money in getting the message out and linking people. And effective political campaigns largely require the time of committed volunteers.

new economic perspectives are academics. they exist in their own domain using their own language. in general transparency, clarity and concision (sp?) is not exactly a strength of academia. i’m all for recognizing the complexity of systems but econSpeak has developed into an artform in and of itself. on sunday i left the comment below on their site

“So back to how we can work together. What I propose is that we have a communication strategy. Use blogs exactly as we are to share general information and then use google plus and google docs to share information specifically to craft help us outsiders craft the laymen’s domain. Tackling topics one by one. Working individually but also collaborating with an overall strategy in mind. I think would be helpful. For example, I am looking to get funding on kickstarter to get some animators involved to make some viral videos. I would love to brainstorm and share my script ideas for the project to get your feedback. I throw the script on google docs and you guys can edit and add comments online based upon your availability and interest. I just got on google plus so if you would like an invite i can send you one just contact me though my blog (dollarmonopoly.com) or scroll down the sidebar and click the “add to circles” button. I completely understand if your plate is full so if time prevents you from participating directly try and get some of your smart students involved.”

rvm Reply:July 19th, 2011 at 11:56 am

Ready to volunteer all the free time I have.

MichaelC Reply:July 19th, 2011 at 3:07 pm

@MichaelC, I have set up a gmail address mmt.advocacy@gmail.com and a blogger site mmtadvocacy.blogspot.com. The blogger site is just a shell right now, but I will fill in some more functionality in a day or so and maybe move it over to a wordpress site later.

Tom Hickey Reply:July 19th, 2011 at 4:34 pm

The MMT Wiki is up and running, thanks to selise who set it up and the people that have contributed to content so far. The idea of the wiki is to gather all MMT resources in a single, easily accessible place, with summaries accessible to non-economists, along with references to sources. All you have to do to contribute is boogey on over to the volunteer page. There’s a blog, too, and a YouTube channel is in the works. The more the merrier.

“Elsewhere, the level of deficits is constrained by a ‘fiscal rule,’ which means the rise in debt is constrained though not technically limited,” Moody’s said, adding that such rule has been effective in Chile.

RE: Social Security & FICA – Aren’t we looking at a huge deflationary shock with regards to our current baby boomer retirement scenario?

You have a significant portion of the workforce earning their peak salary at the end of their careers, and by all accounts they were spending a large portion that salary pre-bust. They then decide to stop making that salary and simply collect social security payments and live off of what little savings they have.

Doesn’t this lead to a pretty large expected decline in demand? Why are people talking about raising FICA to cover this potential SS “shortage”? It should be the opposite!

that would shift income from people working for a living to corporate profits if the govt deficit remains the same, as wages lag, as new hires make less than those leaving. which has been happening. and followed profits coming down from competitive pressures, which may now be happening as well.

and should be a good thing, as it means we can enjoy lower taxes for the same size govt. be our govs don’t get it and again turn a good thing into a bad thing.

Thanks for the response. I’ve been thinking a lot about Social Security since discovering MMT about a month ago.

Additionally, although I’m stereotyping, I imagine that as mid 20th century generations are replaced by late 20th century generations in the workforce, an expected an increase in productivity should occur, mainly due to the widespread adoption and familiarity with the PC by the younger generations.

While we do lose a large amount of institutional knowledge when an older employee retires, the current economic climate (and lack of savings) should entice them to at least work part time, so this knowledge could be kept on retainer and accessed on demand.

Close: “I belabor the idea that lack of demand is the fundamental cause of economies producing below their potential because the failure to recognize the centrality of demand can have catastrophic consequences. But for Hitler and the military buildup up he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent and with the recovery promise of the New Deal shattered by the premature attempt in 1937 to reassert the traditional virtues of deficit reduction and inflation control.”

But no cigar: “Recoveries continued and sometimes even accelerated until they were murdered by the Federal Reserve with inflation control as the motive. When the Fed became concerned about inflation accelerating, usually too late, it raised interest rates and crunched credit, stifling housing, business investment, and consumer durable purchases and causing the economy to go into recession.

Misses the interest income channel (stimulative) and the too small fiscal deficits that develop during expansions…

Then some customary deficit dovishness thrown in for good measure: “Most important, the fiscal debate needs to take on board the reality that the greatest threat to the nation’s creditworthiness is a sustained period of slow growth that, as in southern Europe, causes debt-GDP ratios to soar. This means that essential discussions about medium-term measures to restrain spending and raise revenues need to be coupled with a focus on near-term growth.”

Warren, I find it amazing that you’ve managed to persistently chip away at the mainstream in the face of endless policy mistakes, and nonsense from the other side without loosing your mind. Hats off. The rest of us must use your example to keep building momentum.

The Federal gov’t can create all the $ it wishes to spend. It doesn’t need any from us (taxpayers), China, Japan or anyone else. When you create your own fiat currency (as the US does), there is no need for debt. None whatsoever. Solvency is never a worry.

(Typical response) “But then you have Zimbabwe, Weimar, etc..!!!!!”

Right! The REAL issue is inflation, not solvency or whether or not we can “afford it”. The correct and honest discussion should be about inflation and how to control it. You can repeal the debt ceiling, but you can’t repeal inflation.